A case study on the Risk-adjusted Financial Performance of The Vice Fund (Management Project)

Nowadays, there is a debate about the possibility that sin stocks bring higher returns than other ones to the investors. This study is a case study on a mutual fund: The Vice Fund. This US fund has a specific investment strategy: it invests in sin stocks.

We compared this mutual fund to The Timothy Fund because they have similar characteristics such as – date of inception, total assets, home country and investment universe, expect the investment strategy. Indeed, The Vice Fund invests in sin stocks and The Timothy Fund does not. Two benchmarks are also used in the study: the S&P 500 Index as a domestic benchmark and the MSCI World Index as an international benchmark.

This study is a case study using a deductive approach on a quantitative ground. The study is done on ten years long from 2003 to 2012. We divided the entire period into three different sub-periods depending of the S&P 500 Index trend. The first and the last sub-periods are bullish and the second one is bearish.

In order to analyse both the financial performances and the risks of The Vice Fund we use several tools. We calculated returns and risk-adjusted ratios: the Treynor’s ratio, the Sharpe’s ratio and the Jensen’s ratio. Because these ratios are less accurate in bearish markets, we calculated the normalized Sharpe ratio by doing linear regressions and we also calculated the modified Sharpe ratio.

In order to perform these calculations, we used DataStream as a database to obtain prices and dividends for the two mutual funds and the prices for the two benchmarks. We got also the one-month T-bill to have a risk-free rate. We found that The Vice Fund had a better average returns performance whatever the market conditions over the period studied.

However the difference between weekly results with The Timothy Plan Fund and the benchmarks is not statistically significant. The risk- adjusted ratios confirmed the superiority of the risk-adjusted financial performance of the sin fund.
Source: Umeå University
Author: Bernardin, Arthur | Dumoussaud, Camille